This Week in Barrons – 4-5-2015:
Thoughts:
Dear Ms. Yellen:
This week I listened to a fascinating talk on our economy given by a panel of economists. The discussion focused around ‘the light’ that I’m seeing at the end of the tunnel – and whether it is actually one of an on-coming train. And this train would produce a pro-longed economic depression that could start within the next 6 months. I was wondering how many of their points you agree with?
- (1) Our Debt is destroying our economy. After WWII, for every dollar’s worth of government debt, our economy experienced $2.41 worth of growth. Currently, due to the staggering amount of our debt, our economic growth has dropped to 3 cents on every dollar, causing our growth to be stifled by the enormity of our debt.
- (2) Our Misery Index is too high. The Misery Index is a number created to measure the amount of economic suffering on a population. It is currently at 32.89. During the Great Depression it measured only 27. A high Misery Index normally precedes recessions. And unfortunately our FED is no longer in a position to bailout our banks because it only has $56B of capital reserves remaining – to support over $4.3T in questionable, unstable banking liabilities.
- (3) Our stock market is over-priced when compared to our productivity. One could make a case for the value of all of country’s public stocks representing (at some level) the fundamental value of that economy. Currently the ratio of the total value of the stock market – divided by GDP is 203%. Prior to the 2008 recession this ratio was 183%, and prior to the ‘Dot Com’ implosion it was 204%.
The economists were making the point that we are heading for a stock market correction, and the loss of wealth this time could exceed $100T. But every severe stock market correction requires a catalyst, and here are a few that they suggested:
- (1) An attack on the U.S. Treasury market: From October 2014 to March 2015 when Russia and China were dumping U.S. Treasuries, our FED bought them (via Belgium) in order to stabilize our economy. But the FED is currently leveraged 77:1 and is (by all measures) ‘tapped out’. What if nations continue to dump U.S. Treasuries? If no one buys them, then U.S. interest rates will rise – sinking our stock market.
- (2) A failing ‘Petro-Dollar’: Because of our strained relationship with Saudi Arabia, they have started selling more oil in exchange for gold or for currencies other than the U.S. dollar. Russia (one of the world’s largest energy exporters), has said: “It’s time to discontinue the dollar as the key reserve currency.” If others follow this pace, and drop the U.S. dollar as their global reserve currency, then the dollar’s value will fall, and cause U.S. interest rates to rise.
- (3) A fragile Chinese banking system: As the banking system in China continues to stretch, a highly leveraged, ‘shadow banking’ system is evolving. Shadow banking has grown over 4,067% since 2005, and is approaching $8T in value. China has many ‘ghost’ cities waiting for inhabitants. If these ‘ghost’ cities do not soon become inhabited, then housing prices will collapse and (along with the ‘shadow banking system’) create a fundamental ‘ponzi scheme’ that could bring down the entire Chinese economy.
- (4) The IMF’s planned replacement of the U.S. Dollar as the world’s reserve currency. In the case of a global financial panic, the world’s Central Banks would be required to re-liquefy their financial markets. Unfortunately our FED is ‘tapped out’ and leveraged 77:1. The IMF (International Monetary Fund) is only leveraged 3:1 and has the only ‘clean balance sheet’ out there. The IMF would print SDRs (Special Drawing Rights), declare them the world’s reserve currency, and effectively replace the U.S. Dollar in that category.
Ms. Yellen – the amount, frequency, and degree of severity of these elements seem to be growing. Would you agree that – that light at the end of the tunnel is truly one of an ‘on-coming’ train?
The Market:
A report surfaced this week showing that of the 102 companies that have pre-announced earnings, only 16 companies have raised their forward guidance while 86 have lowered theirs. That is the worst ratio for an earnings season in 7 years. Historically April has been a good month for the market; however, this time around we have: (a) lousy economic reports, (b) corporate earnings estimates that will be missed to the downside, and (c) a collapsing DOW transportation index (IYT). Adding this all up, this market has a lot of work to do to turn itself around, and create a sustained move higher.
Our economy has been supported for years by Central bank interventions, debt increases, corporate buybacks, and Non-GAAP / Pro-forma accounting. Monday, the Atlanta Fed announced that their estimate for 1st Quarter GDP was a mere 0.2%. The Kansas Fed and the Dallas Fed reported their lowest economic numbers in 2 and 6 years respectively. Recently, the manufacturing outlook in Texas turned negative for the first time in two years, and for the first time in 6 years the energy sector lost jobs.
Traditionally the first week in April is fair, the second week is rotten, and the third and fourth weeks are pretty good. The explanation given is: (a) the first week is new monthly and quarterly money, (b) the second week is people selling stocks and bonds to raise money to pay their taxes, and (c) the third and fourth weeks are people spending their tax refunds. Therefore, next week is not historically all that great of a week for stocks. And with the poor ‘Non-Farm Payrolls’ report that came in on Friday, the markets will indeed need to keep the S&P index above the March lows of 2,040 in order to try and save the month. If we were to lose the 2,040 area, then I think we are in for a fairly hefty market correction. But as long as the S&P remains above that level, we should be range bound between 2,040 and the March high of 2,108.
But as the disclaimer says: “Past performance is not indicative of future results". April does not have to turn around in the 3rd and 4th weeks. We need to let the market prove itself by passing technical milestones before acting too bravely this coming week. The market simply feels like there is a great ‘shaking out’ coming, and if we’re not prepared – we too will be ‘shaken apart’.
TIPS:
I would be remiss if I didn’t take a moment to reflect upon the absolute disaster that was Friday’s ‘Non-Farm Payroll’ report. The estimates were for job gains of 245,000. The report showed that we only gained 126,000 jobs. But wait, it gets worse. Almost 60% of those 126,000 jobs (72,000) were fake – and simply added using the ‘birth/death’ model. It gets even worse: the number of people ‘NOT in the workforce’ has grown to 93,173,000. That is the first time we've ever seen that number over 93 million. Of course the ‘spinmeisters’ blamed the weather and had us look at the averages, but with 60 of 69 economic releases missing estimates, and 86 of 102 companies lowering their 2015 outlook – it’s not that big of a stretch to say that our economy is hanging by a fraying thread.
As a further cautionary signal, in the year 2000 (45 days prior to the crash and with the NASDAQ making new highs) the transportation index (IYT) sold off. Just this week the transportation index broke its 2nd ATR (average true range) to the downside – signaling a potential, larger market downside correction. When looking at specific stocks that are poised for a downside move, look no further than: Zillow (Z), Federal Express (FDX), and Alibaba (BABA). Also, often accompanying a down market is the movement of Gold (GLD) and Silver (SLV) to the upside. You could even look toward the gold miners moving higher and play them via NUGT.
I’m currently holding:
- AAPL – SOLD APR Iron Condor: + 119 / - 121 to -131 / + 133
- BABA – BOUGHT APR Put Debit Spread: +87 / -81
- DUST – SOLD APR2 Calls: -17
- GLD – BOUGHT MAY Call Debit Spread: +112 / -120
- HD – BOUGHT APR Call: +112, and SOLD APR2 Put Credit Spread: -114 / + 113
- KR – BOUGHT APR – Call Butterfly: +75 / -77.5 / -80
- LL – SOLD APR – Put Credit Spread: -30 / +28, then SOLD APR – Call Credit Spread: -35 / +40
- NUGT – BOUGHT MAY Calls: +10
- ORCL – BOUGHT MAY / JUNE Call Calendar: $45
- RUT – BOUGHT May Call Butterfly: +1170 / -1240 / +1300
- SLV – BOUGHT May Call Debit Spread: +15 / -17.5
- SPX – SOLD APR – Iron Condor: +2010 / -2015 to -2160 / +2165
- SYK – SOLD APR – Put Credit Spread: +85 / -87.5 and Buy Butterfly: +95 / -97.5 / +100
- URI – SOLD APR – Iron Condor: +80 / -82.5 to -95 / +97.5
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Please be safe out there!
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